If you invest in the stock market, mutual funds, real estate, or gold and silver, this information is crucial for you. The Central Board of Direct Taxes (CBDT) has released a key figure that helps taxpayers save lakhs in taxes. Every year, taxpayers eagerly await this number, known as the Cost Inflation Index (CII). It is used to calculate capital gains tax and helps in saving substantial amounts on taxes. For the current financial year 2024-25, the CII has been set at 363. This index helps in getting tax exemptions on capital gains in relation to inflation.
What is Cost Inflation Index?
In simple terms, the Cost Inflation Index, or indexation, is a number used under the Income Tax Act to calculate the capital gains tax. It provides taxpayers with the benefit of inflation adjustment while calculating capital gains. The CII is released annually by the CBDT. For instance, the CII for the current financial year is 363, while it was 348 for the previous financial year 2023-24 and 331 for 2022-23.
Importance of Cost Inflation Index
Everyone knows that the price of everything increases every year due to inflation. Something that costs ₹100 today might cost ₹110 or more next year. When you sell an investment after a long period and earn a profit, you are required to pay tax on that profit. However, the Income Tax Department acknowledges that not all of the profit is pure gain since part of it is due to inflation. This is where the CII comes in. It helps separate the inflationary part of your profit, revealing the actual profit on which tax is payable.
Uses of Cost Inflation Index
The benefit of indexation is applicable on investments where the Income Tax Department levies capital gains tax. It’s important to note that the benefit of indexation is available only on long-term investments. Capital gain refers to the profit made when you sell an investment for more than its purchase price. Long-term capital gain is considered when the investment is held for a long period, which varies across different types of investments. For instance, long-term in the case of debt funds is three years or more. This means if your investment has been held for more than three years and you sell it for a profit, you will get the benefit of indexation while paying tax on that profit. The same applies to gold and silver if sold after three years.
How Indexation Saves Lakhs in Taxes
To understand the benefits of indexation, let’s take an example. Suppose the long-term capital gains tax on a debt fund is 20% plus a 4% cess, making it a total of 20.8%. With the benefit of indexation, the tax payable reduces to around 6-7%. This requires the use of the CII, which is released by the CBDT every financial year. For those filing their ITR for the previous financial year, the CII for 2023-24 was 348. Here’s how to use and benefit from it with a complete calculation.
Example Calculation
Suppose you bought a property in May 2014 for ₹50 lakhs and sold it ten years later in May 2024 for ₹1.5 crores. Initially, it seems like you made a long-term capital gain of ₹1 crore. Without indexation, you would have to pay 20.8% tax on ₹1 crore, amounting to ₹20.8 lakhs. However, with indexation, you only need to pay ₹15,47,000, saving ₹5,33,000 in taxes.
Here’s how the calculation works:
- CII for 2014-15: 240
- CII for 2024-25: 363
The indexed cost of the property is calculated as: Indexed Cost=Purchase Price×CII of Sale YearCII of Purchase Year=50,00,000×363240=75,62,500
Now, subtract the indexed cost from the sale price to get the actual capital gain: Actual Capital Gain=1,50,00,000−75,62,500=74,37,500
Finally, calculate the tax on the actual capital gain: Tax=74,37,500×20.8%=15,47,000
This results in a direct tax saving of ₹5,33,000.